A Monthly Journal of the IDSA
Pipeline Politics in the Caspian Sea Basin
Shah Alam * , Researcher, IDSA
The growing significance of the Caspian region in international politics and economy is because of its geostrategic location and the huge oil and gas reserves in the area. The extraction and transportation of oil and gas from the region has emerged as a major source of geopolitical rivalry. The proposed pipeline routes of numerous companies of the extraregional powers are intended to contain the influence of the regions two powerful countries-Russia and Iran. These powers are seeking to increase their influence in the region by providing alternative energy supply routes to the producing countries-all of them former Soviet republics-so as to reduce their dependence on Russia. However, Russia on the other hand, is keen to maintain its strategic interests in the Caspian region and would like the bulk of the pipelines to pass through it. Similarly, Iran is interested that the pipelines pass through its own territory. The crux of the entire geopolitical rivalry is the uninterrupted flow of oil and gas from the region to the Western energy markets by restricting Russian and Iranian control on the oil and gas exploration, development and pipeline routes. The winners in the struggle over pipeline routes are likely to secure major strategic advantages, while the losers would be marginalised in the coming years. The latest crisis in Afghanistan seems to have altered the equations in the region. Russias cooperation with the US and the West in the war against terrorist groups and the Taliban in Afghanistan has increased its role and importance in the region. Will the US accept a major Russian role in transporting oil and gas from the region and ensuring regional security? With the US expanding its presence in the region and its military involvement in Afghanistan, it is poised to consolidate its base of influence in the Caspian region. Russias and Irans roles in the region would then be inevitably affected.
The Caspian region is witnessing intense geopolitical rivalry because of the large amounts of oil and gas reserves in the region. This rivalry is currently focused on the control over extraction and transportation of oil and gas from the region. The crucial issues are: the large reserves of oil and gas, claims of ownership over these resources by various countries, multiple route options for pipelines, environmental concerns, social and political conflicts and the growing militarisation of the region. The struggle over pipeline routes for transportation of oil and gas from the region is a key indicator of the intense geopolitical rivalry in the region.
The proposed pipeline routes of the various oil and gas companies of the extra-regional powers are aimed at containing the influence of the regions two powerful countries-Russia and Iran. These extra-regional powers are seeking to increase their influence in the region as well as to provide alternative energy supply routes for the producing countries-all of them former Soviet republics-so as to reduce their dependence on Russia. On the other hand, Russia is seeking to maintain its dominance over the Caspian region by ensuring that the bulk of the pipelines continue to pass through its own territory. Iran is similarly keen that new pipelines go through it and is promoting this alternative route as the shortest, cheapest and least vulnerable. The US wants an uninterrupted flow of oil and gas from the region and would like to ensure pipeline security by restricting Iranian and Russian influence on the oil and gas exploration, development, and pipeline routes.
Will the Western powers, in particular the United States, succeed in building future pipelines to bypass both Russia and Iran, and thereby diminish Russian influence in the region? Will the latest events in Afghanistan alter the proposed Caspian pipeline routes? This paper looks at the evolving political alignments and struggles over access to energy resources of the Caspian Basin and argues that the winners in the struggle over pipelines would secure strategic advantages while losers would be marginalised in the region in the years to come.
The latest situation in Afghanistan might alter the equation in the Caspian region. The growing US military presence in the region and its involvement in Afghanistan will help the US in establishing and consolidating the bases of its influence and permanent presence in the Caspian region. On the other hand, Russias cooperation with the US and the West in the war against Afghanistan has enhanced its role and importance in the region. The liquidation of the Taliban regime in Afghanistan would help Russia in containing the growing fundamentalist and separatist movements in Chechnya and Dagestan. Moreover, Russia hopes, in return, the US will accede to its major role in ensuring the flow of Caspian oil and gas via the northern route guaranteed by it. Would the US really allow Russia to play a greater role in transporting oil and gas from the region and in ensuring regional security?
The New Great Game
In the 19th Century, Britain and Russia contested for influence in the wide Eurasian belt extending from the Balkans to Afghanistan. 1 In the 20th century, the players in the Great Game changed-Russia gave way to the Soviet Union after 1917, and after the World War II, Britain was replaced by the United States. 2 The Cold War ended with the collapse of the Soviet Union in the 1990s, giving birth to many new states on the debris of the collapse. These new states were mostly Turkic-speaking in Central Asia and the Caucasus. Thus, once again Central Asia and the Caucasus have become the centre of the Great Game. The New Great Game in the 21st century in its substance is a continuation of the historical zero-sum rivalry. But this rivalry is not as simple and plain as in the past. There are complex factors involved in the game now with many new players. The New Great Game has been characterised as being between Iran and Turkey, between Iran and the United States, between Russia and Turkey; and between Iran and Russia on the one hand and the United States and Turkey on the other. 3
In the New Great Game, interdependence among the players as well as among the states of the region have further complicated the situation. But the US and Russia remain the major players in the regions energy politics. 4 To a lesser extent, the multinational oil and non-oil companies are also players in the New Great Game. But there is a difference in their interests-while the states involved in the game are mainly interested in enhancing their strategic position, influence and interests, the companies involved have primarily economic interests.
In general, the US policy towards Russia is to integrate Russia into the Western- oriented market (like G-8) and security arrangements. But the US policy towards Russia, specifically in relation to Central Asia and the Caucasus region is different and seeks to contain Russian influence in the region through one means or the other. Turkey is increasingly a key actor and an ally of the US in the new geopolitics of energy. The regions legacy and infrastructure, however, still favour Russia. Transport and communication infrastructure remain heavily oriented towards the former Soviet republics and Russia still has a stronghold on the present oil and gas pipeline networks. The proposed pipeline routes via the South Caucasus and Iran can break the Russian monopoly. Attempts by the Caspian countries assisted by foreign actors to weaken their dependence on their Russia dominated infrastructure (and on each other) are at the heart of Caspian geo-politics. 5
But Russia wants to retain its influence in the Caspian region. Its near abroad policy towards Central Asia and the Caucasus is an assertion of this goal. On the other hand, the US is also seeking to contain Iran and exclude Russias interests in the Caspian region. 6 Tehran, meanwhile, has been pursuing a pragmatic policy towards its northern neighbours and focusing on economic issues and underplaying ideological differences with the aim of expanding its ties with the region and securing pipeline connectivity. 7
Oil and Gas Reserves and Geopolitics
Apart from its geostrategic significance, the Caspian Sea Basin has attracted the interest of world powers, as mentioned earlier, because of the large amounts of oil and gas reserves in the region. 8 The estimates of the Caspian Basin oil and gas reserves vary widely. The geologists and energy analysts have so far been unable to assess accurately the oil and gas reserves in the region due to lack of any major recent scientific study or surveys. There are, therefore, large discrepancies in the estimates. In the early 1990s, the US Department of Energy estimated that Caspian oil reserves would exceed 273 billion barrels, around 16 per cent of global oil reserves. 9 But by 1999, the US Department of Energy retreated from its earlier projection and estimated 123 billion barrels, about 7.2 per cent of world reserves. 10
However, within the oil and gas industrial sectors, the revised figure is still considered too high. Various sources from the US and Iran indicate, the recoverable oil reserves in the Caspian Sea Basin is around 170-200 billion barrels which would make the Caspian Sea Basin the third largest oil and gas reserve in the world after the Persian Gulf and the Western Siberia. 11
According to Geoffrey Kemp, 200 billion barrels of oil and 279 trillion cubic feet of natural gas can be recovered from the Caspian Sea Basin. Estimates, therefore, vary widely from institution to institution because of lack of reliable data. While these republics were with the Soviet Union, Moscow paid little attention to the exploration and exploitation of the regions resources. For our analysis here we will rely on the estimates of the Oil & Gas Journal Energy Database: International Energy Statistics Sourcebook. Table-1 demonstrates that proven oil reserves in the region are 78.2 billion barrels. So far as gas reserves in the Caspian region are concerned, Table-2 shows that the region has 237.3 trillion cubic feet gas.
Economically, exploration and production costs of oil and gas in the Caspian Sea Basin are high. Oil analysts estimate that the Caspian Sea Basins oil production cost will be around US$5 per barrel. This compares very high with Saudi Arabias oil production cost of US$1 per barrel. The Caspian Sea Basins production cost is however than the production costs of North Sea and Siberia, US $13 and US $ 6 per barrel respectively. Thus, Persian Gulf is likely to remain the principal source of oil (due to huge reserves, easy access, and cheaper price) for the world in the foreseeable future. 12
Despite having large amounts of oil and gas reserves, physical access to the reserves remains an obstacle due to the regions physiography. The use of foreign capital and technology, primarily for exploration and transportation of the Caspian Sea Basins oil and gas reserves is the cause of infusion of extra-regional political and economic influences in the region. There is not only the involvement of oil corporations (eg. Mobil Oil, Chevron, UNOCAL and Texaco of the US, British Petroleum and British Gas of the UK, Royal Dutch Shell, Total of France, Agip of Italy, and Statoil of Norway) in the regions oil and gas exploration and development projects but the Caspian Sea Basin affairs have also acquired importance in the foreign policy of a number of extraregional countries. While energy is one of the most important factors behind the policies of extraregional players in the Caspian Sea Basin, it is not the only reason for their presence in the region.
Table-1: Oil Reserves
Source: Oil & Gas Journal Energy Database: International Energy Statistics Sourcebook, 9th Edn., 1999 & Energy Statistics Source Book, 14th Edn., 1999)
Table-2: Natural Gas Reserves
(Billion cubic feet)
(Source: Oil & Gas Journal Energy Database: International Energy Statistics Sourcebook, 9th Edn, 1999 & Energy Statistics Source Book, 14th Edn., 1999).
The regions physiography constraints have complicated the transportation of resources from the region. The region has no single means of exporting anything without crossing another countrys territory and has no direct access to navigable international waterways. So, the regional states are heavily dependent upon other countries for trade and transportation routes for their natural resources. However, pipelines, in whatever direction they are built, would be long and carry a high transit fee. The Caspian Sea Basin has thus the problem of routes in transporting its resources to the world markets, the biggest obstacle to Caspian oil is its distance to markets . . . between $3 and $4 per barrel just to get the oil to a sea port for export and the additional fixed overhead of shipping costs. 13
Legal Status of the Caspian Sea
Prior to the disintegration of the Soviet Union, the Caspian Sea 14 was the border of Iran and the former Soviet Union. With the collapse of the Soviet Union, Iran lost its territorial contiguity with Russia. During the Soviet period the two countries had signed two treaties covering the Caspian Sea area-in 1921 and 1940. The Treaty of Friendship of 1921 between the Soviet Union and Iran (Persia), and the Soviet- Iranian Trade and Navigation Agreement 1940, are no more relevant in the context of the geopolitical changes in this area. In the changing environment, a new and mutually acceptable legal status of the Caspian Sea needs to be established which is acceptable to all the littoral states. The vast resources in the region have generated the contested question of ownership which holds the key to the stability and development of the region. The legal issue still centres on the treaties signed by Iran and the former Soviet Union in 1921 and 1940 (which did not cover seabed boundaries and resources exploration) till a new legal agreement decides the shares of waters and resources of the Caspian Sea. 15
In the first half of the 1990s, Iran and Russia proposed a condominium principle for exploration and exploitation of natural resources of the Caspian Sea which was opposed by Turkmenistan. Under the proposed principle, a 45 nautical mile coastal zone would fall under the jurisdiction of the respective littoral states and rest would be used jointly. Iran and Russia insisted that under provisions of the 1982 United Nations Convention on the Law of Sea (UNCLOS), the Caspian Sea is a lake (since it has no outlet to another sea or ocean) and so, it should not be governed by the Convention. 16
According to the Law of the Sea, the five states surrounding the Caspian would divide the sea and undersea resources into national sectors. A median line would be established from the shores of each country and provide the national boundaries. In Iranian and Russian perceptions, such categorisation as territorial waters, continental shelf or exclusive economic zones envisaged by UNCLOS were not applicable to the Caspian. They contended that the oil and gas in the seabed would not be utilised except by consensus of the five littoral states.
In February 1997, Turkmenistan signed an agreement with Kazakhstan for temporary extension of its border into the sea out to its median line. The Caspians legal status is determined by a joint agreement. Simultaneously, both recognised each others right and that of all littoral states to carry out work to develop mineral resources in the seabed. Turkmenistan declared that the seabed and the waters of the sea cannot be divided on a bilateral basis. 17
On the other hand, Azerbaijan welcomed the national sector division of the seabed along the median line and asserted in April 1998 that not only the floor but also the water and surface of the sea should be divided up. 18 After hectic consultations between Azerbaijan and Turkmenistan in March 1998, both countries agreed on the division of Caspian seabed into national sectors. But both had different positions on the issue and could not resolve their dispute over sovereignty in several major oil fields, including the Kapaz (Serdar) and Chirag oil fields. 19
The territorial dispute between Azerbaijan and Turkmenistan intensified when the Turkmenistan Government invited an international consortium to develop Kapaz oil field closer to the Turkmenistan than the Azerbaijani coast. In June 1998, Turkmen-istan signed an agreement with an international consortium headed by the US Mobil Company which Azerbaijani Government flatly rejected. However, border disputes will affect the positions of either state on the issue of the Caspians legal status.
However, there have been significant changes in Russias position on the division of the Caspian Sea. Russia and Azerbaijan agreed that resources located in the Caspian Sea should be demarcated by the median line through the centre of the Sea. Both agreed to divide the Caspian Sea into national sectors, Russia insisted on joint use of the Caspian Sea waters to allow free navigation and to facilitate the solution of the environmental problems. Same principle was applied when the Kazakh-Russia agreement was concluded. The Caspian Sea seabed was divided into national sectors for common use of the Caspian waters for navigation and fishing. Under the agreement, only the seabed and its mineral resources were to be divided along the median line, while the Caspian waters and the biological resources remained open to common use. This agreement was strongly protested by Azerbaijan, which insisted on division of not only the seabed but also the surface of the sea. The Kazakh-Russian agreement faced strongest opposition from Iran. Iran resisted division of the Caspian Sea into national sectors, whether of the seabed or of the surface, until a comprehensive agreement on its legal status was reached by all littoral states. Iran clearly stated that until a comprehensive agreement is signed by all littoral states, the 1921 and 1940 treaties, which did not envisage the division of the Caspian Sea, should remain in force.
The territorial disputes in the Caspian Sea add another geopolitical dimension to the region. Division of the seabed and subsea resources into national sectors, while leaving the surface as an international waterway, would provide the right of shipping among Russia, Kazakhstan and Iran without transgressing the Turkmenistan or Azerbaijan jurisdiction. If such a proposal materialises, it would be feasible to lay submarine pipelines between any two states without interference from a third state. On the other hand, if the seas surface were to be divided into national sectors, Russia and Kazakhstan would lose their rights of passage to Iran; simultaneously Russia and Turkmenistan would lose sharing a common border. Strategically, Azerbaijan will benefit the most by such division. Only Azerbaijan would retain a common border with all the littoral states and thereby remain a key conduit for trade and pipeline routes.
Oil and Gas Pipeline Routes from the Caspian Sea Basin
The geopolitics of the region have complicated the determination of routes for transporting oil and gas from the Caspian Sea Basin to markets in Europe, Asia and elsewhere. Transporting oil and gas out of the region, has been a key issue in the United States foreign policy for the last few years. Countries like Iran, Turkey, and Russia are competing to gain a greater share in this competition. However, the US favours Turkey for political reasons. Apart from gains and losses, Iran is strategically at stake. The winners of the pipeline game will gain strategic benefits while losers will be marginalised strategically. The victory in the struggle will receive not only billions of dollars in the form of transit fees. The real gain will be control over the pipelines which will be the most important factor of geopolitical influence in the Trans-Caucasus and in Central Asia . . . 20
At present, five transporting routes are available and proposed. These are Northern routes, Southern routes, Western routes, Eastern routes, and Southeastern routes.
The northern routes are Russias proffered choice. Their terminal is at Novorossiysk, a Russian seaport on the Black Sea. Russia is trying to convince both Azerbaijan and Kazakhstan that their interests will be protected if their oil and gas pass through the northern routes. These routes are from Baku to Novorossiysk and from Tengiz oil field in western Kazakhstan to Novorossiysk. But Russias position has been weakened due to political instability in the north Caucasus, especially Chechnya and to lesser extent Dagestan which have threatened the security of the Baku-Dagestan-Chechnya- Noverossiysk pipeline routes. Nearly 150 km of the pipeline runs through this unstable region of Dagestan and Chechnya. Besides, both Azerbaijan and Kazakhstan remain concerned about Russias political dominance over them. Obviously, Russia is seeking to retain its pre-eminant position in the region through passing oil and gas pipelines mainly, not exclusively, through its territory while Caspian States seeking to change this situation and their excessive dependence on Russia. These countries are concerned about their continued excessive dependence on Russian pipeline routes because it would allow Russia to unilaterally increase transit fees and constrain exports or threaten these actions to gain economic or political concessions from them. 21
However, in the efforts of the last 10 years in the Caspian, only a Russian-backed pipeline has been completed in September 2001 which is carrying oil from Kazakhstan and Turkmenistan to the Russian port of Novorossiysk on the Black Sea. Russia has gained through using energy as strategy to revive its influence in Kazakhstan and Turkmenistan. This newly opened Novorossiysk pipeline from Tengiz oil field in Kazakhstan can carry 60 million tonnes of oil each year. The amount of oil, which is flowing through the pipeline, is only a fraction of the entire world supplies, but the pipeline marks a significant gain for Russia in terms of transit fees and political leverage in Central Asia.
The western routes for transporting oil and gas from the region are primarily supported by the US in order to contain the Russian influence and dominance in the region. The western routes are preferred by the US, Azerbaijan, Georgia, and Turkey, and are intended to bypass Iran and Russia. The western routes originate from Baku in Azerbaijan, terminate at the Georgia port of Supsa on the Black Sea, from where the oil is taken by tankers through the Bosporous to Europe. The 920 km Baku-Supsa pipeline passing near the Armenian populated Azerbaijans unstable and volatile Nagorno-Karabakh region, is a source of security concern. The same route passes via Georgia and terminates hardly 20 km away from Abkhazia. The political instability in Georgia-Abkhazia and South Ossetia-has become a source of concern for the safe flow of energy via Georgian regions. The other problem is environmental. There is Turkeys incessant protest that the Bosporous is too congested and further increase in tanker traffic will endanger Istanbuls safety. Despite these problems, this route is a politically acceptable alternative in bypassing both Russia and Iran.
The US proposed East-West pipeline routes aim to exclude Iran and Russia both. The Baku-Ceyhan pipeline is a part of the US East-West pipeline routes. This route is favoured by the US as the Main Export Pipelines (MEP). The United States attraction to the Ceyhan route and the Trans-Caspian line emanates from its desire to build an East-West axis of influence and commerce in the Eurasia region. 22 In the US perception, the MEP would enhance its influence in the Caspian Basin. The US supports Turkey, both in its resistence to greater traffic of oil through the increasingly-clogged artery of the Bosporous and in its desire to regain some influence in the Caspian. Through Turkish influence in the Caspian, will the US itself retain influence there, and crucially will it be able to counter attempts by Iran and Russia to expand in so strategically a crucial zone. 23
The Baku-Ceyhan pipeline is strongly backed by the US. The Special advisor to the US President and Secretary of State for Caspian Basin Energy Diplomacy at Department of State, John Wolf, stated at Arthur Andersons Annual London Oil and Gas Symposium that Baku-Ceyhan means the East-West corridor is moving from vision to fact. 24 Wolf further added, Kazakhstan would become one of the worlds major oil producing countries . . . and Baku-Ceyhan can provide a commercially unbeatable export route for Kazakhastan oil. 25
Such a strong support as of the US to Turkey for a 1730 km pipeline from Baku via Georgia to Ceyhan, a terminal on its Mediterranean coast, reflects the strategic drive of the US in the Caspian Basin. 26
The Baku-Ceyhan pipeline route is also strongly supported by Azerbaijan and Georgia. The US also favours a Trans-Caspian Pipeline (TCP) to transport oil and gas from Turkmenistan and Kazakhstan in order to enhance and strengthen the East-West transit corridor for oil and gas from the Caspian Basin. Turkmenistan and Turkey signed a gas supply agreement in May 1999 under which 16 billion cm/y of gas will be delivered through the planned TCP originating from gas fields in the basin and running under the Caspian and across the Caucasus to an eventual terminus at Ankara. 27
But the attraction of TCP is not much because of the economic considerations (the minimum cost for laying such a pipeline is estimated to be at least US $2 billion), and if realised, the TCP would seriously erode the Russian influence in the Caspian Basin.
The US-backed TCP will originate from the gasfields in Turkmenistan and cross the Caspian Sea and Caucasus before entering Turkey. The Blue Stream originates from Russia and would cross the Black Sea before entering Turkey. Both the TCP and Blue Stream are more than just rivals for the Turkish gas market. According to Turkeys Botas Petroleum Pipeline Corporation, consumption of natural gas in Turkey will increase from 19 bn cm/y in 2000 to 55 bn cm/y in 2010 and 82 bn cm/y in 2020. 28
Turkey is seeking natural gas not only for its own growing consumption demand but also to be a potential transit route to markets in Western and Southern Europe. In order to materilise its goal, Turkey struck a deal for supply of gas totalling 61.2 bn cm/y from five different countries-Iran, Russia, Algeria, Nigeria, and Turkmenistan. 29 The Blue Stream pipeline will originate from Russia and is to be built an underwater gas pipeline across the Black Sea to deliver 16 bn cm / y of Russian gas to Turkey. 30 The Blue Steam gas pipeline project is to be completed jointly by the Russian Company, Gozprom and the Italian Energy Company, Eni. These two projects, the TCP and Blue Stream, are seen as an embodiment of the US- Russia competition for influence over the oil and gas resources of the Caspian Sea Basin.
The East-West transit corridor is also supported by Ukraine as an alternative transport route for oil and gas from the Caspian Sea Basin to Europe via the Black Sea and Ukraine.
The southern routes have to pass through Iran and would terminate on the Persian Gulf. They are supported by Iran and various oil companies. The Southern routes make sense economically and commercially since they are the shortest, quickest and cheapest routes and would pass through relatively safer territories and pose no serious environmental hazard. Despite all positive points, these routes are firmly opposed by the US due to estranged relations between the US and Iran.
Chinas growing energy demand has forced it to diversify its energy supply sources. For China, Kazakhstan is an attractive source because of its comparatively easy access. China shares borders with Kazakhstan, Kyrgyzstan and Tajikistan. In order to materialise its energy security, China signed a deal with Kazakhstan in September 1997 to build a 4,000-5,000 km long and extremely expensive pipeline ($3.5 to 5.0 billion) from two fields in Kazakhstan, passing through Xinjiang province in Western China. This is said to be the largest project among the planned pipelines. 31
The Tengiz and Aktyabinsk oil fields located in Western Kazakhstan will be the main and potential suppliers to this proposed pipeline. This project will meet not only the growing energy demand of China but that of Japan, South Korea and other countries too through the Chinese harbours located on the China Sea. 32 The project is currently on hold.
Chinas influence can rapidly grow in the Caspian region through this route. Another proposed 6,700 km long pipeline from Turkmenistan to China would pass through Uzbekistan, Kazakhstan and across China to the markets in the Far East. 33 The main proponents of the Turkmenistan-China pipeline are Exxon, Mitsubishi and China National Petroleum Company.
The Southeastern route is favoured by Pakistan, Afghanistan, Saudi Arabia Delta Oil, and the US UNOCAL Corporation. They seek to transport oil and gas from Turkmenistan and Kazakhstan through Afghanistan to Pakistan and India. But the US UNOCAL Corporations withdrawal from the project due to instability in Afghanistan and Osama bin Ladens terrorist activities put a question on the projects feasibility. The Talibanisation of Afghanistan and the Talibans identification with Osama bin Laden forced the US UNOCAL Corporation to withdraw its proposal. The US UNOCAL abandoned the $2 billion project in 1998.
With the liquidation of the Taliban regime, hope emerges that Afghanistan would emerge as a stable country and would seek a place in the world economy. A stable Afghanistan would revive the interests of foreign countries and companies to invest in a 1,400 km. long pipeline route passing through Afghanistan that would carry Caspian oil and gas to Pakistans coast on the Arabian Sea and to India. This will be beneficial to both India and Pakistan. According to an US Energy Department report, Afghanistans significance from an energy standpoint stems from its geographical position as a potential transit route for oil and natural gas exports from Central Asia to the Arabian Sea. 34 If Afghanistan would provide a better oil and gas transit route, a northern route passing through Russia would become less attractive and consequently Russia would lose its dominance over oil and gas exportation from the Caspian region.
The Iranian Route
The Iranian route for transporting oil and gas from the Caspian Sea Basin is the shortest, cheapest and also relatively safer, posing no serious environmental hazards. Irans geography, swap arrangements and low transit fees are incentives for energy suppliers of the Caspian Sea Basin.
There are favourable factors in making Iran a central actor in the Caspian Basin oil and gas exports. First, the single most important factor is Irans geostrategic location among the Caucasus, the Caspian Sea, Central Asia, the Persian Gulf, the Gulf of Oman, Turkey, Iraq, Afghanistan, and Pakistan. Iran can take oil through swap arrangements from Turkmenistan, Kazakhstan and Azerbaijan to its northern markets. Third, Iran has extensive export facilities in the Persian Gulf.
Despite the Iranian route being cheap and short, the US does not favour this route because politically, the US still seeks to constrain Iran. Strategically, the US does not want Iran to be important by laying the pipeline across its territory. Strategically, one of the most important factors to bypass Iran is, the US and the West seeking to diversify energy supplies in order to reduce their dependence on oil imports from the Persian Gulf. 35
In order to make the Iranian route attractive, Iran has lowered the transit fees, from $4 per barrel to $2.40 per barrel. Still the US and various companies are opposing the Iranian route even though alternative export routes via the Caucasus or Russia cost $5-8 per barrel. 36
Commercially, exports of energy via Iran would provide the Caspian states an alternative to dependence on East-West routes. Pipelines between Iran and the Caspian states would also strengthen political ties. The US, however, may not acquiesce to the growth of Iranian influence in the Caspian region. Strategically, from American perspective, it makes little sense for Western countries to further increase their dependence on the Persian Gulf. This is the driving force behind the US policy in the Caspian region. 37 The logical consequence is a preference for multiple alternative egress routes to bypass Iran. Under the swap arrangements Iran is trying to develop with the Caspian states, the Nehka pipeline would be used to transport oil to refineries in northern Iran such as those in Tehran, Isfahan, Tabriz, Arak and other locations. 38 In exchange, Iran would deliver an equivalent value of its oil at its export terminals in the Persian Gulf for markets to Asia and Europe. The swap arrangements would allow a Caspian producer to avoid the regions endemic and complex problems and to supply a ready local market. The Caspian oil from Turkmenistan, Kazakhstan, and Azerbaijan would be shipped/piped to refineries in Iran. Presently, two Iranian ports, Nehka and Anzali, are best situated to receive swapped oil by sea.
Iran-US relations ruptured in 1979 when the followers of Ayatollah Khomeni overthrew the Shah and seized the US embassy in Tehran. Prior to the Revolution, Iran was an ally and partner of the US in maintaining the regional peace and stability, but after the 1979 Revolution it turned into an adversary at both the regional as well as the global level. The Iranian Revolution 1979 and its deriving legitimacy from religion, threatened the US interests in the region. A committed ally of the US in guarding and maintaining regional peace and stability fell apart and became hostile.
In the 1980s the relations between Iran and the US were hostile. By the early 1990s, relations improved to some extent as a result of the US estrangement from Iraq after the Gulf War. However, no diplomatic breakthrough could be made. President Clinton imposed a trade ban on Iran in March 1995. 39 New economic sanctions were imposed in 1996 as a result of the Bill sponsored by New York Senator Alphonse DAmato. 40 Called the Iran-Libya Sanction Act (ILSA) 1996, it imposed restrictions on foreign companies not to invest more than $20 million in Irans and $40 million in Libyas oil and gas sectors. The motive behind the US sanctions against Iran was to contain and isolate Iran and cripple its economy so that it could not emerge as a formidable power that could challenge the US interests in the region and elsewhere.
Khatamis victory in the May 1997 presidential election and the victory of the moderates in the February-May 2000 Majlis elections have led to a moderation of the US policy and an attempt to reopen dialogue and renew ties. The US administrations changing perceptions are visible in the lifting of sanctions on certain items in March 2000. The US policy towards Iran has moved towards some form of engagement rather than isolation and containment which were the pillars of the past policy. There is an increasing understanding among policy makers and advisors that US attempts to isolate Iran, would discourage political reform and push the country into closer relations with Russia and China. US refusal to bridge ties with Iran prevents potential economic benefits through trade and investment, pushes Iran into closer relations with Russia and discourages Iranian political reform. 41
This is being recognised in some of the thinking on the US approach towards pipelines through Iran. By opposing the Iranian pipeline route, it prevents US companies from attaining future economic benefits, remains unresponsive to Irans political reform, hinders Caspian economic independence and pushes Iran and Russia closer together. 42
The US companies and their affiliates are not permitted by Executive Order to have business deals with Iran which tend to rule out their involvement in transportation projects that pass through Iranian territories. The US State Department has already declared that Washington would not exempt Caspian pipelines from sanctions. 43 The US, however, is still in a dilemma whether a weak or a strong Iran would be in favour of the US. Economically and politically weak and fragile Iran would strengthen the conservative hands and would provide sufficient space and factors to maintain their hold over Iran. On the other hand, a strong Iran would pose a serious challenge to the US interests in the region in the years to come. In both situations, Iran-US relations will be marred by suspicion, mistrust and acrimony.
Social and Political Conflicts: Implications for Pipelines
The Caspian Sea Basin is surrounded by social and political conflicts. Not a single proposed or operational pipeline passes without crossing multiple contentious regions. Regional conflict, political instability, and lack of regional cooperation are the greatest hurdles to the development of Caspian oil and gas. Conflicts in Chechnya, Abkhazia, and Nagarno-Karabakh are linked to the oil factor and they in turn affect the security of both existing and planned oil and gas pipelines in the region. Moreover, the growing social unrest and religious (Muslim) fundamentalism in Central Asian countries would affect the prospect of transportation of oil and gas from the region.
Chechnya has become a source of concern for Russia because it has been seeking independence from the Russian federation. Chechnya has been fighting a war with Russia to get independence from Russia. It is a pre-dominantly Muslim majority republic which is seeking its independence on the basis of being a different ethnic religious community. Territorial division on the basis of ethnic or religious community is a farcical demand. However, ramifications of the Chechnya conflict are seen in the region and especially in Dagestan which borders on Chechnya, as Dagestan becoming a new hotspot in the North Caucasus. 44
The Chechen conflict has a direct impact on the security of the Baku-Novorossiysk pipeline which passes through Dagestan and Chechnya. The law and order situation in Dagastan has severely deteriorated since 1998 when abductions, killings and explosions became common occurences. Spread of religious fundamentalism is the principal source of political instability in the region. There are moves to establish a United Islamic State consisting of Chechnya, Dagestan, Ingushetia, Kabardino-Balkaria, and Karachai-Cherkessia. 45 The entire region, especially Dagestan, has become a serious security threat to Russia due to Muslim religious fundamentalists.
In order to contain the growing Muslim fundamentalism in the region, Russia has taken various measures. It has modernised radar stations, and signalling and communications facilities and fortified border crossing points. However, despite administrative and security measures and legal restrictions, it has failed to check the terrorist and separatist movement in Dagestan. 46 The situation in Dagestan deteriorated after the establishment of a Congress of Chechen and Dagestani Peoples in April 1998. It announced its main objective as the unification of Chechnya and Dagestan. Social and political situation further deteriorated in August 1998 when the spiritual leader of Dagestans Muslims, Mufti Said Mohammed Abubakayev, was assassinated thus plunging Dagestan into chaos.
Georgia has been passing through two major territorial conflicts-Abkhazia and South Ossetia seeking independence from Georgia. 47 Political conflicts in Abkhazia and South Ossetia have challenged and threatened the Georgian territorial integrity and sovereignty. Abkhazia has demanded its independence from Georgia and asserted that it would never accept even the broadest autonomous status within Georgia, only acceptable status for it is that of equal partner with Georgia within a confederation, which would imply common foreign and defence policies and policy on minority rights, foreign trade, border control, customs and environmental issues. 48
Abkhazia would remain with Georgia as a federation partner with equal status. However, Georgia is looking for an early resolution of the Abkhazia conflict for the security of an oil terminal in Supsa as well as Baku-Supsa oil pipeline. The Supsa oil terminal on the Black Sea is very close to Abkhazia which would affect the security of the Supsa oil terminal.
Another conflict area in Georgia is South Ossetia. South Ossetia is seeking autonomous status within Georgia. Georgias and South Ossetias leaders are searching for a political solution to this contentious issue of settling down South Ossetias status within Georgia. 49 However, the security of the Baku-Supsa pipeline has been under continued threat not only because of the unresolved conflict in Abkhazia but due to the overall political instability and uncertainty in Georgia.
The Armenian-populated enclave, Nagorno-Karabakh, seeks separation from Azerbaijan. Nagarno-Karabakh has maintained a de facto independence for eight years. The Armenian forces are still occupying six Azerbaijani districts which do not belong to Nagorno-Karabakh. So, Azerbaijan insists that the Armenian forces be withdrawn from six Azerbaijani districts which do not belong to Nagarno-Karabakh and a satisfactory political settlement of the conflict be sought. Azerbaijan also insists that the political resolution of Nagarno-Karabakh should be within Azerbaijan with the broadest possible autonomy. But Nagarno-Karabakhs Armenian population fears ethnic discrimination if Nagarno-Karabakh is re-established as a part of Azerbaijan. 50
The complex Nagorno-Karabakh problem is further exacerbated by the oil factor and has seriously affected the oil export route. Indeed, without proper political settlement of the Nagorno-Karabakh conflict, it would be difficult to ensure the security of the Baku-Ceyhan pipeline. The US and Turkey as key elements of the East-West transit corridor would fail to work without settlement of the Nagorno-Karabakh conflict. The shortest route from Baku to Ceyhan being across the territory of Nagorno-Karabakh and Armenia, an early and sustainable settlement of the Nagorno-Karabakh conflict becomes indispensable.
The Central Asian countries have been also passing through social and political tensions. The emergence of Islamic fundamentalism has become a threat to the regional security. Consequently, the religious fundamentalism also threatens the security of oil and gas pipelines. Transporting oil and gas from Turkmenistan and Kazakhstan, through Afghanistan to Pakistan, and eventually to India is marred due to instability in Afghanistan. The overthrow of the Taliban Government has raised hope for stability in the region. If Afghanistan emerges as a stable country, it would provide a safe and secure pipeline passage across its region.
Russia Losing Control Over the Caspian Sea Basin
Many new independent states have emerged on the debris of the collapsed Soviet Union. Only Russia has emerged as a real successor of the disintegrated Soviet Union, but only in the military realm. It has remained fragile socially, economically and politically. As a result, extra-regional powers took advantage of the situation and are gaining a foothold in the newly independent states of the former Soviet Union through various means, thus undermining the Russian dominance and influence in the Caspian Basin region. 51
The extra-regional powers are providing economic, political and military assistance to these states in order to diminish the Russian domination and exert their own influence in the region. Since the collapse of the Soviet Union, the US involvement has gradually increased in the Caucasus and Central Asia. 52
No unanimity has yet emerged among the Caspian Basin states on the issue of the joint use of the Caspian Sea resources. The legal status of the Caspian whether it should be defined as a Sea or a Lake has been undermining the Russian influence. The legal status of the Caspian Sea is a very thorny issue. Russia has argued for a joint control of the entire seabed in order to exert its influence over the exploitation and deposition of the Caspian Seas natural resources. There is little doubt that Russia has lost this battle because no other country except Iran is supporting the idea of joint use of the Caspian Sea. 53
The growing presence of the foreign companies for exploration and development of oil and gas fields and for transportation would diminish the Russian influence in the Caspian region. American, French, German, Italian, Japanese, and Chinese companies are actively working in exploration and development of the oil and gas fields. Russias Lukoil company is also involved in exploration and development of oil and gas fields but its participation share is not considerably good. Lukoil has managed to enter a consortium which is involved in only four major Azerbaijan oil exploration projects. Russia is not a major player in both Kazakhstans and Turkmenistans oil and gas development projects. Less participation of Russian companies in the development of oil and gas of the Caspian Basin states would act as a catalyst in eroding the Russian influence in the region. 54 On the other hand, the US oil companies are playing a leading role in both the Caucasus and Central Asia, with more than 80 oil and gas-related joint ventures operating, and over 30 major US companies involved in commercial activities. 55
The growing US activity in the region is a source of concern for Russia. Russia perceives the growing US activity in the region as a serious threat to its interests. Rapidly developing US interests are there viewed as proof of this trend, indicating that the US is obtaining powerful levers of influence over the strategically important region and allowing Russia to be squeezed out of the Transcaucasus. 56
Russia is convinced on the issue that the next twist of the spiral of Russia-US rivalry for spheres of influence on the post-Soviet territory will be in the Transcaucasus. 57 The volatile situation in the region, domestic instability in all three Caucasus states, the existence of unresolved conflicts, and the prospects of extracting every resource from the Caspian Basin-all these factors could turn the Caucasus into a stage of intense geopolitical rivalry between the US and Russia. 58 As a result, pipeline politics has taken the centre-stage position in the region.
The US proposal of the East-West transit corridor seems a potential lever over Russian control. The US seeks to bypass both Russia and Iran. The Baku-Ceyhan pipeline proposal is a part of it. The US supports Baku-Supsa pipeline which is in full operation. The Baku-Ceyhan pipeline is actively supported by the US despite its length and cost. The idea of multiple pipelines, most of which would be in non-Russian territory, is being pursued with vigour.
Caspian Basin security is influenced not only by developments in the states of the region but also by their growing military cooperation with outside powers. Some of them have become regular participants in the NATOs Partnership for Peace (PFP) programme and are getting military assistance from the NATO countries. The US and Turkey are assisting Azerbaijan and Georgia through providing training to their armed forces and arms modernisation programme. Kazakhstan has close relations with the NATO countries and its military doctrine is also oriented towards the NATO. Kazakhstan believes that its military doctrine orientation towards the West and NATO would not only strengthen regional security but also help to minimise the reliance of the Central Asian republics on Russia and consequently mitigate Russian domination in the region. 59
Therefore, Kazakhstan, along with Uzbekistan and Kyrgyzstan has been strengthening its military cooperation with the US and Turkey. On the other hand, the growing military cooperation between Russia and Armenia is also a source of concern for Azerbaijan and Georgia. In the Georgian perception, laying an oil pipeline from Azerbaijan across Georgia as part of the East-West transit corridor would enhance Western interests in protecting Georgias security and reducing its dependence on Russia in security affairs. 60 Azerbaijan shares the same perception as Georgia in its security matters.
However, developments in the Caspian Basin region are reflecting that it is turning into an area of serious confrontation between different local and extra-regional powers. This may lead to the US and/or NATO adopting a direct military role in the defence of conflicting oil and gas-related interests. 61
The Central Asian and the Caucasus states emerged from the collapse of the Soviet Union, full of diverse potential-for economic development, energy supplies, as well as conflicts. The Caspian Sea Basins security environment is heavily swayed by conflicting interests of regional and extra-regional powers over the vast oil and gas reserves. The regional issues, if not resolved amicably, would invite extra-regional powers meddling in their affairs. There are two burning issues in the Caspian Sea Basin-the legal status of the Caspian Sea and the ethnic conflicts. These two sensitive issues can at anytime jeopardise the security of the region. So, these issues should be properly and carefully resolved. Particularly, littoral states are deeply divided over the issue of the legal status of the Caspian Sea which has complicated oil and gas transport routes from the Caspian Sea to the world markets. Conflicting interests are further exacerbated by the increasing involvement of the US, Europe and Asian countries.
As far as pipeline routes for transporting oil and gas from the Caspian Sea Basin are concerned, they have become an intense source of competition among the Caspian Sea Basin states. This competition is further exacerbated by the extra-regional powers. The shortest and the cheapest Iranian route of transporting oil and gas from the Caspian Sea Basin has become a victim of the US-Iran estranged relations. The US is seeking to bypass Iran on two grounds-economic and strategic. Economically, the US wants to see a weak Iran which would not challenge the US interests in the region and elsewhere. Strategically, the US does not want to increase its energy dependence on the Persian Gulf through passing oil and gas routes over Iranian territories. However, the US should not ignore the shortest, cheapest Iranian routes and consider the Iranian pipeline route as an option in its multi-pipeline policy. Both the Baku-Supsa and Baku-Ceyhan pipeline routes are long, costly and vulnerable, although, Baku-Ceyhan proposed and Baku-Supsa operational pipelines are favoured by the US to bypass both Iran and Russia.
The growing US and European involvement in the region has squeezed the sphere of the influence of both Iran and Russia. The US and the Wests greatest interest in the Caspian Sea Basin is free access to the regions resources. Geopolitical competition, regional instability and ethnic conflict in the Caspian Basin have complicated the situation in the region and invited extra-regional powers to the region. If Afghanistan emerges as a stable country after the liquidation of the Taliban, it would be a bright prospect for passing the earlier proposed pipeline routes through it.
The author thanks Shri Sujit Dutta, Senior Fellow at IDSA, for his suggestions and comments while writing this article.
Note *: Dr. Shah Alam is a researcher at IDSA. He obtained his PhD from the Centre for West Asian and African Studies, School of International Studies, Jawaharlal Nehru University. He specialises in Iranian studies and has contributed articles on various issues dealing with the economy, polity and foreign policy of Iran. He is also a keen observer of developments in the Persian Gulf region. Back.
Note 4: Hooshang Amirahmadi. Challenges of the Caspian Region. In Hooshang Amirahmadi, Ed. The Caspian Region at a Cross Road: Challenges of a New Frontier of Energy and Development. 2000. Macmillan Press Ltd. London. pp. 113. Back.
Note 8: The Caspian Sea Basin Comprises territory of the 5 littoral states: Iran, Azerbaijan, Turkmenistan, Kazakhstan, and Russia. While oil and gas reserves will be dealt with, the Caspian Sea Basin will include all Central Asian countries Turkmenistan, Kyrgyzstan, Tajikistan, Uzbekistan, Kazakhstan, and Caucasus countries Azerbaijan, Armenia, Georgia, and exclude Iran and Russia. Back.
Note 11: M. Sarir, Utilisation of oil and gas in the Caspian region, Amu Darya, 1997, 2(1), p. 14; Gennady Chufrin. The Caspian Sea Basin: the security dimensions. In SIPRI yearbook 1999: Armaments, Disarmament and International Security. 1998, Oxford University Press, Oxford. pp. 213-215; Bruce R. Kuniholm, n. 1, pp. 249-250; M. Hamilton. The Last Great Race for Oil Reserves? Companies Scramble to Tap up to 200 Billion Barrels in the Caspian Sea Region, The Washington Post, April 26, 1998 cited in Adrian W. Burke, Pipeline Politics: US Corporations Lead Foreign Economic Policy, Journal of South Asian and Middle Eastern Studies, XXIV(1), Fall 2000, p. 3. Back.
Note 12: Geoffrey Kemp. The Persian Gulf Remains the Strategic Prize. Survival, Winter 1998-99, 40(4) pp. 132-49; Anoushiravan Ehteshams. The Geopolitics of Hydrocarbons in West Asia. The Iranian Journal of International Affairs, Fall 1999, XI(3), pp. 435-54; Andrian W. Burke, no. 11, p. 3. Back.
Note 13: N. Jana, Managing Director, Eurasia Business Unit, Chevron Overseas Petroleum Inc., Caspian Oil in 1999: The Imperative of World-Class Performance, delivered lecture to the Institute of Petroleums IP Week Conference on Caspian Oil and Gas, February 18, 1999, pp. 1-2. Back.
Note 14: The Caspian Sea is the largest Lake in the world and divides Asia and Europe and links the Caucasus, Central Asia, Southwest Asia and Russia. It is stretched to 371000 square km. and its depth is 1025 metres. It is about 1200 km long from north to south and 320 km wide from west to east. Its salt content is 12.7 per cent. There are around 50 islands in the lake with a total area of 350 square km. Back.
Note 22: Hooshang Amirahmadi. Pipeline Politic in the Caspian Region. In Hooshang Amirahmadi, Ed. The Caspian Region at a Cross Road: Challenges of a New Frontier of Energy and Development. 2000. Macmillan Press Ltd. London, 2000. p. 162. Back.
Note 26: Economic potential undermined, Petroleum Economist, July 1999, 66(7), pp. 11-17; Irreconcile differences, Petroleum Economist, July 2000, 67(7), pp. 18-19, Gennady Chufrin, no. 11, pp. 217-220. Back.
Note 31: Narsi Ghorban, By Way of Iran: Caspians Oil and Gas Outlet, in Hooshang Amirahmadi, Ed. The Caspian Region at a Crossroad: Challenges of a New Frontier of Energy and Development 2000. Macmillan Press Ltd., London, p. 153. Abraham S. Becker, no. 17, p. 111 Amirahmadi, n. 22, pp. 166-167. Pipeline Diplomacy Central Asia: Problems and Prospects, Spotlight On Regional Affairs (Institute of Regional Studies, Islamabad), October 2000, XIX(10), pp. 27-29. Back.
Note 35: Geoffrey Kemp, no. 12, pp. 132-149. Despite Some Signs, Do not Look for Caspian Petroleum to Flow Through Iran Russia Today, June 8, 1998 cited in Anoushiravan Ehteshami, no. 12, p. 441; Carolyn Miles, The Caspian Pipelines Debate Continues: Why Not Iran?, Journal of International Affairs, 53(1), pp. 333-334; Chufrin, n. 11, p. 218; Hooshang Amirahmadi, no. 22, p. 166. Slow route on the Silk Road, Petroleum Economist, 66(5), pp. 28-30. Back.
Note 38: Geoffrey Kemp, no. 12, p. 143. Firm oil prices give energy financing a lift, Petroleum Economist, June 2000, 67(6), p. 60, Anthony H. Cordesman and Ahmed S. Hashim, Eds., Iran: Dilemas of Dual Containment, 1997, Westview Press, Colorado, 1997, pp. 102-103. Back.
Note 43: Paul R. Gregory, Developing Caspian Energy Reserves: The Legal Environment, In Caspian Energy Resources: Implications for the Arab Gulf, 2000 The Emirates Centre for Strategic Studies and Research, Abu Dhabi, p. 41. Back.
Note 44: I. Rotar, Voyna na territory Dagestana fakticheski neizbezhna (War on Dagestans territory is actually inevitable), Nezavisimaya Gazette, September 11, 1997, p. 1, cited in Vladimir Baranovsky, Russia: Conflicts and peaceful settlement of disputes, in SIPRI Yearbook 1998: Armaments, Disarmament and International Security. 1997, Oxford University Press, Oxford, p. 116. Back.
Note 55: Rosemarie Forsythe, The Politics of oil in the Caucasus and Central Asia, Adelphi Paper 300, Oxford: Oxford Univ. Press. Oxford, pp. 36-39; Frank C. Alexander Jr., Caspian Reserves Luring Operators, Oil and Gas Journal, July 21, 1997, p. 23; John McCarthy, no. 5, pp. 20-25. Back.
Note 59: O. Kasenov, Military Aspects of Security in Central Asia: National and Regional Strategies of Security. In S.N. Mac Farlaue, Ed. Regional Security in Central Asia. 1995. Centre for International Relations Queens University, Kingston, p. 81. Back.
Note 61: Robin Bhatty and Rachel Bronson, NATOs Mixed Signals in the Caucasus and Central Asia, Survival, Automn 2000, 42(3), pp. 129-145; Amy Myers Jaffe and Robert A. Manning, The Myth of the Caspian Great Game: The Real Geopolitics of Energy, Survival, Winter 1998-99, 40(4), pp. 112-129. Back.